Childcare & Your Taxes: Optimizing Tax Credits

Did you know how expensive childcare was going to be? For some, it might not even seem worth it to go back to work, depending on your income level. According to Care.com, the average family spends $18,000 a year on childcare. But the good news is that you are most likely eligible for the child and dependent care tax credit, which will help. And hopefully your employer offers a Flexible Spending Account, or FSA. Here is what you need to know to take advantage of these tax benefits.

Child and Dependent Care Tax Credit

You can claim the credit whether your child goes to daycare, preschool, or you have an in-home nanny or au pair. It does not cover babysitting services for date night, however. Once your child enters kindergarten you can no longer claim the credit. Although before- or after-school care is still covered until the age of 12.

In order to claim the tax credit, both you and your spouse have to be working or actively searching for work. Working from home or working for yourself both count, as long as you are earning an income.

You can claim up to $3,000 if you have one kid in childcare, and up to $6,000 for two or more kids. The credit is calculated as a percentage of your actual expenses based on your income, ranging from 20% to 35%.

Childcare FSA

If your employer offers an FSA, consider taking advantage of setting aside childcare costs to the account. You can set aside up to $5,000 a year, which will save you money because it goes into an account before taxes are calculated.

An FSA covers the same childcare circumstances as outlined above for the tax credit, but it also may cover before- and after-school care, transportation provided by a caregiver, or application fees and deposits incurred while seeking childcare.

Much like a medical FSA, a childcare FSA has a use-it-or-lose-it component, although if you’re working full-time you’ll most likely be spending a lot more than $5,000 annually on childcare.

Check out this tax wizard from HealthHub to give you an example of the money you will save by claiming the tax credit and/or using a childcare FSA. And if you’re not sure if you’re eligible for the tax credit, the IRS has a handy online tool to help you out. Take note: There is a trick to figuring out how to use both of these benefits together. When you calculate your credit, you must subtract the FSA reimbursement amount from the amount of credit you can claim. Of course the IRS provides detailed instructions on how to calculate the credit.

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